Reserve Bank governor Alan Bollard said developments since March pointed to lower medium-term inflation than previously projected. He believed the main contributing factors were weaker global growth and an unwarranted tightening in financial conditions due to higher long-term interest rates and a stronger exchange rate than expected.

He expected the hefty decline in the OCR over the past year to pass through interest rates

to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing.

He said this, combined with the stimulus from fiscal policy, would support the kiwi economy, leading to activity hitting a low and then picking up. It would take some time for economic activity to return to its former glory however, given the scale of the global financial crisis and domestic adjustments underway.

It’s expected the OCR could still move modestly lower over the coming quarters.